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Annual Report 2005
Delivering the best television experience

Table of contents

  • Page 1
    Delivering the best television experience Annual Report 2005

  • Page 2
    With new interactive features such as a Game Mix channel for its exclusive NFL SUNDAY TICKETâ„¢ and MEGA MARCH MADNESSâ„¢ packages, DIRECTV is leading the industry in introducing unique interactive services.

  • Page 3
    Content leadership > Unique content > Superior high definition television > Exclusive interactive services > Easy-to-access video on demand DIRECTV is creating original shows such as CD USA that features the largest selection of back-to-back performances of today's most popular bands.

  • Page 4
    Cutting-edge technology With its new DIRECTV 2Go service along with industry leading digital video recorders (DVRs) and high definition receivers, DIRECTV is enriching its customers' entertainment experience through new features including increased mobility, customization and ease-of-use.

  • Page 5
    Top ranked customer service DIRECTV has consistently been among the highest rated multichannel video providers in customer satisfaction surveys over the past five years. DIRECTV has approximately 15,000 customer service representatives delivering world class customer care 24 hours a day, seven days ...

  • Page 6
    ...segment's $1,283 million of cash provided by operating activities by its $747 million of cash paid for property, equipment and satellites during 2005. These figures can be found in the DIRECTV Holdings LLC Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 10...

  • Page 7
    ... the ability to program it from remote locations via cell phones and other devices. This DVR is also an important driver of future growth, as we improve our video on demand and advertising services. While much of our technology work is geared to enhancing what the customer sees on the screen, we are...

  • Page 8
    ...easy-to-use video on demand, or VOD, service that will give customers who have the DIRECTV Plus DVR, easy access to popular programming on television. Our initial offerings will allow customers to view prime-time hits from the FX channel a full 24 to 48 hours before their first broadcast, along with...

  • Page 9
    ..., we have opened new company-operated call centers to increase the quality and effectiveness of customer response. We have also continued to introduce an array of new tools to improve service. We overhauled our web site, making it an increasingly important part of sales and service. Last year, about...

  • Page 10
    ... with Sky Mexico and own over 40 percent of the combined business. We expect to combine with Sky Brazil after receiving regulatory approval later this year, giving us more than 70 percent of the new company. In the region's other markets, we own over 80% of DIRECTV Latin America and offer service in...

  • Page 11
    ... Committee Corporate Information Corporate Office 2230 East Imperial Highway El Segundo, CA 90245-0956 (310) 964-5000 Executive Offices 6th Floor 1211 Avenue of the Americas New York, NY 10036 Company Information Media Relations (310) 964-4069 Investor Relations (212) 462-5200 DIRECTV.COM NYSE...

  • Page 12
    ...and equipment" and "Cash paid for satellites" from "Net Cash Provided by Operating Activities" from the Consolidated Statements of Cash Flows found in the DIRECTV Holdings LLC Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 10, 2006. This financial measure...

  • Page 13
    ... 10-K ፤ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR អ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-31945...

  • Page 14
    ... or implied by the relevant forward-looking statement. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. 1

  • Page 15
    ...entertainment programming via satellite to residential and commercial subscribers. Through April 22, 2005 we also operated the Network Systems segment, which was a provider of satellite-based private business networks, or VSATs, and consumer broadband Internet access. On April 22, 2005, we completed...

  • Page 16
    ... special interest channels, and approximately 50 pay-per-view movie and event choices. Although DIRECTV U.S. distributes over 1,100 local channels, a subscriber generally receives only the local channels in the subscriber's home market. As of December 31, 2005, DIRECTV U.S. provided local channel...

  • Page 17
    ... receiving satellite dish antenna, a digital set-top receiver and a remote control, which we refer to as a DIRECTV↧ System. After acquiring and installing a DIRECTV System, subscribers activate the DIRECTV service by calling DIRECTV U.S. and subscribing to one of DIRECTV U.S.' programming packages...

  • Page 18
    ... national HD channels, network HD programming from FOX, ABC, CBS and NBC in their owned and operated markets, as well as several NFL games each week through its NFL SUNDAY TICKET package. As part of its HD expansion plan, DIRECTV U.S. launched the first two of four new satellites in 2005, SPACEWAY...

  • Page 19
    ...an agreement with NBC Universal that will give DIRECTV subscribers the top programs of NBC and its cable entertainment networks, USA, SCI FI and Bravo, hours after they air, commercial free, for 99 cents. Later in 2006, with the introduction of the next generation of the DIRECTV Plus HD DVR, DIRECTV...

  • Page 20
    ... media center will also provide DVR functionality throughout the home and support HD and standard-definition video signals. In addition, DIRECTV U.S. announced an agreement with Intel Corporation, or Intel, to enable remote viewing of DIRECTV's entertainment services and programming to PC screens...

  • Page 21
    ...in-sourcing specific customer service functions, DIRECTV U.S. has assumed more accountability and control of its subscribers' experiences. In the second half of 2004, DIRECTV U.S. opened two new owned and operated customer call centers. In 2006, DIRECTV U.S. plans to further expand its company owned...

  • Page 22
    ... DIRECTV owned and operated customer service center is scheduled to open in Missoula, Montana in 2006. Potential and existing subscribers can call a single telephone number 24 hours a day, seven days a week, to request assistance for hardware, programming, installation and technical support. DIRECTV...

  • Page 23
    ... are currently subscribers to cable. In addition, most cable providers have completed network upgrades that allow for enhanced service offerings such as digital cable, HD local channels, broadband Internet access and telephony services. Cable companies bundle these services with their basic services...

  • Page 24
    ...and international programming under the DIRECTV brand to approximately 1.6 million subscribers in 27 countries throughout the region of which approximately 85% are located in Brazil, Argentina, Venezuela and Puerto Rico. The pay television and other emerging broadband video and data markets in Latin...

  • Page 25
    ...to receive mid-year 2006. DTVLA's local operating company in Mexico, DIRECTV Mexico, has sold its subscriber list to Sky Mexico and, as a result of completing the transfer of its subscribers to Sky Mexico, ceased providing services during 2005. In exchange for the subscriber list, we received a note...

  • Page 26
    ... that make use of the radio spectrum; and • compliance with the Communications Act and FCC rules governing U.S.-licensed DBS and DTH systems. The FCC grants authorizations to satellite operators that meet its legal, technical and financial qualification requirements. The FCC conditions such...

  • Page 27
    ... sport blackout requirements, which apply to all distant network signals, may require costly upgrades to our system. Further, a recent FCC order interpreting the requirement that satellite carriers retransmit local digital signals with ''equivalent bandwidth'' of significantly viewed digital signals...

  • Page 28
    ... Plan. The FCC has not yet proposed a new system for assigning DBS authorizations. There can be no assurance that we will be able to obtain additional DBS capacity under whatever system the FCC implements in the future. • Rules Governing Co-Existence With Other Satellite and Terrestrial Services...

  • Page 29
    ... view that we are in compliance with the agency's geographic services rules, or that the FCC will not require us to make potentially cumbersome and costly changes to our offerings. • FCC Conditions Imposed In Connection With the News Corporation Transactions. The FCC approved the News Corporation...

  • Page 30
    ... as Federal Trade Commission, FCC and state telemarketing and advertising rules, and subscriber privacy rules similar to those governing other MVPDs. DIRECTV U.S. has agreed with the Federal Trade Commission to (a) review and monitor compliance with telemarketing laws by any companies it authorizes...

  • Page 31
    ...31, 2005, we had approximately 9,200 employees. We believe that our employee relations are good. None of our employees are represented by labor unions. ACCESS TO COMPANY REPORTS Our website address is www.directv.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on...

  • Page 32
    ... • bundling their analog video service with expanded digital video services delivered terrestrially or via satellite, or with efficient two-way high-speed Internet access or telephone service on upgraded cable systems; • having greater bandwidth capacity to deliver programming or services beyond...

  • Page 33
    ...programming, cable-affiliated programmers generally must sell and deliver their programming services to all multi-channel video programming distributors on non-discriminatory terms and conditions. The Communications Act and the FCC rules also prohibit certain types of exclusive programming contracts...

  • Page 34
    ... as part of the subscriber's purchase or lease of a DIRECTV System. In addition, we pay commissions to retailers for their efforts in offering a DIRECTV System to consumers. Our subscriber acquisition costs may materially increase to the extent we continue or expand current sales promotion...

  • Page 35
    .... Satellite programming signals have been stolen and may be stolen in the future, which could result in lost revenues and would cause us to incur incremental operating costs that do not result in subscriber acquisition. The delivery of subscription programming requires the use of conditional access...

  • Page 36
    ... cases, operation of our satellites, such policies typically cover the loss of the satellite itself and not the business interruption or other associated direct and indirect costs. DIRECTV U.S. does not currently expect to purchase in-orbit insurance for any of its satellites scheduled for launch...

  • Page 37
    ... and retain these employees. To access technologies and provide products that are necessary for us to remain competitive, particularly in the area of broadband services, we may make future acquisitions and investments and may enter into strategic partnerships with other companies. Such investments...

  • Page 38
    ...such as RBOCs are implementing and supporting digital video compression over existing telephone lines and building out fiber optic lines to enhance their capabilities to deliver programming services. While these entities are not currently providing MVPD services on a significant basis, many have the...

  • Page 39
    ... a satellite system operator to reduce power, avoid operating on certain frequencies, relocate its satellite to another orbital location and/or otherwise modify planned or existing operations. For example, SES has petitioned the FCC for a declaratory ruling to allow it to provide DBS service using...

  • Page 40
    ... with doing business internationally, which include political instability, economic instability, and foreign currency exchange rate volatility. All of DTVLA's operating companies are located outside the United States. DTVLA operates and has subscribers located throughout Latin America and the...

  • Page 41
    ... DIRECTV GROUP , INC. Corporation, is the Chairman of our Board of Directors, and Chase Carey, who is currently a director of and was formerly employed by News Corporation, is our President and Chief Executive Officer and a member of our Board of Directors. Additionally, two current News Corporation...

  • Page 42
    ...November 3, 2005, the judge entered an order essentially staying the proceedings pending the arbitration between Darlene, DIRECTV and DLA LLC. We and Darlene have filed demands for arbitration under the terms of the dispute resolution provision of the DLA LLC limited liability company agreement. The...

  • Page 43
    ...during the fourth quarter ended December 31, 2005 are summarized below: In April 2001, Robert Garcia, doing business as Direct Satellite TV, an independent retailer of DIRECTV System equipment, instituted arbitration proceedings against us in Los Angeles, California regarding commissions and certain...

  • Page 44
    THE DIRECTV GROUP , INC. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is publicly traded on the NYSE under the symbol ''DTV.'' The following table sets forth for the quarters indicated the high and ...

  • Page 45
    ... the Annual Meeting of Stockholders scheduled to be held on June 6, 2006. ITEM 6. SELECTED FINANCIAL DATA Years Ended and As of December 31, 2004 2003 2002 (Dollars in Millions, Except Per Share Amounts) 2005 2001 Consolidated Statements of Operations Data: Revenues ...Total Operating Costs and...

  • Page 46
    ..., exclusive of depreciation and amortization expense separately below Broadcast programming and other costs of sale ...Subscriber service expenses ...Subscriber acquisition costs: Third party customer acquisitions ...Direct customer acquisitions ...Upgrade and retention costs ...Broadcast operations...

  • Page 47
    ... assets. To compensate for the exclusion of depreciation and amortization expense from operating profit, our management and Board of Directors separately measure and budget for capital expenditures and business acquisitions. We believe this measure is useful to investors, along with GAAP measures...

  • Page 48
    THE DIRECTV GROUP , INC. SUMMARY DATA-(concluded) Selected Segment Data Years Ended December 31, 2005 2004 2003 (Dollars in Millions) DIRECTV U.S. Revenues ...% of Total Revenues ...Operating Profit ...Add: Depreciation and Amortization ...Operating Profit Before Depreciation and Amortization ... ...

  • Page 49
    ...or completed the following actions in support of this strategy during 2004 and 2005: Acquisitions • On October 8, 2004, we entered into the Sky Transactions, which include the pending merger of Sky Brasil with DIRECTV Brasil, the sale of our DIRECTV Mexico subscriber list in exchange for an equity...

  • Page 50
    ... of the cash payments and fees associated with the transaction, to expense over the remaining life of the terminated DIRECTV service distribution agreement of seven years. Divestitures • On April 22, 2005, we completed the sale of a 50% interest in a new entity, HNS LLC, that owns substantially...

  • Page 51
    ... million during 2005 and cash, net of the premium paid and transaction costs, increased $966.0 million. See Note 9 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for further discussion of these refinancing transactions. During 2003, DIRECTV U.S. raised...

  • Page 52
    .... subscribers activate the DIRECTV service. See ''Accounting Changes'' in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for additional information. DIRECTV Latin America Sky Transactions. As part of the Sky Transactions, during the year ended...

  • Page 53
    ... upgrade programs for DVR, HD receivers and local channels, our multiple set-top receiver offer and similar initiatives. Retention costs also include the costs of installing and/or providing hardware under our movers program for subscribers relocating to a new residence. Broadcast Operations...

  • Page 54
    ..., DIRECTV U.S. introduced a set-top receiver lease program that will result in a significant change in reported operating costs and expenses in future periods. Currently, under DIRECTV U.S.' sales model, all subscriber acquisition, upgrade and retention costs (including the cost of set-top receivers...

  • Page 55
    ... for sports programming contract payments, approximately $204 million in net cash requirements for the Sky Transactions and slightly higher capital expenditures for satellites and broadcast equipment to support our launch of new local and HD channels, and to replace and backup existing satellites...

  • Page 56
    ...the HNS businesses in 2005 and 2004. Total Operating Costs and Expenses. by segment: Operating Costs and Expenses By Segment: The following table presents our operating costs and expenses Change 2005 2004 $ (Dollars in Millions) % DIRECTV U.S...DIRECTV Latin America Network Systems ...Eliminations...

  • Page 57
    ... the second quarter of 2005, which we discuss in Note 21 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report. The $50.8 million in income from discontinued operations relates to the PanAmSat and HSS businesses sold in 2004. Loss on sale of discontinued...

  • Page 58
    ... ...Operating Costs and Expenses, exclusive of depreciation amortization expense shown separately below: Broadcast programming and other costs of sale ...Subscriber service expenses ...Subscriber acquisition costs: Third party customer acquisitions ...Direct customer acquisitions ...Upgrade and...

  • Page 59
    ... of costs in key areas such as subscriber acquisition, upgrade and retention. DIRECTV U.S.' broadcast programming and other costs of sale increased $1,039.6 million primarily as a result of the increased number of subscribers and annual program supplier rate increases. Subscriber service expenses...

  • Page 60
    ... costs in 2005 related to the merger in Colombia and certain subscriber acquisition, upgrade and retention costs now being expensed under Puerto Rico's new sales model. Previously, Puerto Rico only leased equipment to subscribers and capitalized the related costs. The improvement in operating...

  • Page 61
    ... as part of the NRTC and Pegasus transactions, partially offset by the $171.9 million decrease in revenues at the Network Systems segment, resulting primarily from the sale of the set-top receiver manufacturing operations in June 2004. Total Operating Costs and Expenses. by segment: Operating Costs...

  • Page 62
    ... in average cash balances and the $11.2 million in interest income received as part of the judgment against Pegasus. The decrease in interest expense resulted primarily from lower interest on DIRECTV U.S.' credit facilities resulting from a reduced interest rate and lower outstanding borrowings...

  • Page 63
    ... in HSS. The $4.7 million loss for 2003 relates primarily to the settlement reached with Boeing of a purchase price adjustment arising out of the 2000 sale of our satellite systems manufacturing businesses. We discuss discontinued operations more fully above in ''Strategic Developments.'' Cumulative...

  • Page 64
    ... ...Operating Costs and Expenses, exclusive of depreciation amortization expense shown separately below: Broadcast programming and other costs of sale ...Subscriber service expenses ...Subscriber acquisition costs: Third party customer acquisitions ...Direct customer acquisitions ...Upgrade and...

  • Page 65
    ... set-top receivers under other upgrade and retention programs drove most of the $588.8 million increase in upgrade and retention costs. Under these programs, DIRECTV U.S. provides DVRs or additional equipment, plus installation, to existing subscribers at significantly reduced prices or for free...

  • Page 66
    ...certain contracts in connection with the bankruptcy, partially offset by the $45.0 million charge related to asset writedowns, severance and other costs related to the ongoing shut-down of DTVLA's Mexico operations as part of the Sky Transactions. Network Systems Segment The following table provides...

  • Page 67
    ... sports programming contract payments and slightly higher capital expenditures at DIRECTV U.S. for satellites and broadcast equipment to support the launch of new local and HD channels, and to replace and backup existing satellites. On February 7, 2006, our Board of Directors authorized a share...

  • Page 68
    ...on our common stock. We currently expect to retain our future earnings, if any, for the development of our business or other corporate purposes. We are a publicly-traded company with our common stock listed as ''DTV'' on the NYSE. As part of the News Corporation transactions completed on December 22...

  • Page 69
    ...related programming exceeds the minimum amounts. Satellite construction contracts typically exclude the cost to insure and launch satellites. Service contract commitments include minimum commitments for the purchase of services that have been outsourced to third parties, such as customer call center...

  • Page 70
    ... Financial Statements in Part II, Item 8 of this Annual Report, which we incorporate herein by reference. Multi-Year Programming Contracts for Live Sporting Events. We charge the cost of multi-year programming contracts for live sporting events with minimum guarantee payments, such as DIRECTV...

  • Page 71
    ... for the cost of disposal. Changes in estimates of future cash flows could result in a write-down of the asset in a future period. Recognition of Rebate Related to Long-Term Purchase Agreement. As part of our sale of HNS' set-top receiver manufacturing operations to Thomson in June 2004, DIRECTV...

  • Page 72
    THE DIRECTV GROUP , INC. Operations at the time such determination is made. See Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for further discussion. ACCOUNTING CHANGE Subscriber Acquisition, Upgrade and Retention Costs. Effective January 1, ...

  • Page 73
    ... Financial Statements in Part II, Item 8 of this Annual Report. The ratings remain on stable outlook. On April 5, 2005, in connection with our April 2005 refinancing transactions, S&P assigned a BB rating to DIRECTV U.S.' senior secured credit facility and affirmed DIRECTV U.S.' BB corporate...

  • Page 74
    ... primarily of DIRECTV's fixed rate borrowings of $1,910.0 million and variable rate borrowings of $1,500.0 million. As of December 31, 2005, a hypothetical one percentage point increase in interest rates related to our outstanding variable rate debt would have increased our annual interest expense...

  • Page 75
    ... DIRECTV GROUP , INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The DIRECTV Group, Inc. El Segundo, California We have audited the accompanying consolidated balance sheets of The DIRECTV Group, Inc. (the ''Company'') as of December 31, 2005...

  • Page 76
    ... ...Operating Costs and Expenses, exclusive of depreciation and amortization expense shown separately below Broadcast programming and other costs of sale ...Subscriber service expenses ...Subscriber acquisition costs: Third party customer acquisitions ...Direct customer acquisitions ...Upgrade and...

  • Page 77
    ... of business held for sale ...Total Current Liabilities ...Long-Term Debt ...Other Liabilities and Deferred Credits ...Commitments and Contingencies Minority Interests ...Stockholders' Equity Common stock and additional paid-in capital-$0.01 par value, 3,000,000,000 shares authorized, 1,391...

  • Page 78
    THE DIRECTV GROUP , INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock and Accumulated Additional Retained Other Total Paid-In Preferred Earnings Comprehensive Stockholders' Comprehensive Capital Stock (Deficit) Income (Loss) Equity Income (Loss) Common Shares (Dollars in...

  • Page 79
    ...from sale of businesses ...Other, net ...Cash Flows from Financing Activities Net decrease in short-term borrowings ...Long-term debt borrowings ...Repayment of long-term debt ...Debt issuance costs ...Repayment of other long-term obligations . . Stock options exercised ...Special cash dividend paid...

  • Page 80
    ... digital entertainment programming via satellite to residential and commercial subscribers. Through April 22, 2005 we also operated the Network Systems segment, which was a provider of satellite-based private business networks and consumer broadband Internet access. Subsequent to the April 22, 2005...

  • Page 81
    ...common stockholders, which provided News Corporation with a total of 34% of our outstanding common stock. In addition, we paid to GM a special cash dividend of $275 million in connection with the transactions. For us, the transactions represented an exchange of equity interests by investors. As such...

  • Page 82
    ... instruments from programming content providers for carriage of their signal and recognize them as a reduction of ''Broadcast programming and other costs of sale'' in the Consolidated Statements of Operations on a straight-line basis over the related contract term. We record equity instruments at...

  • Page 83
    ... program (for subscribers relocating to a new residence), multiple set-top receiver offers, DVR (digital video recorder), HD (high-definition), local channel upgrade programs and other similar initiatives, and third party commissions we incur for the sale of additional set-top receivers to existing...

  • Page 84
    ...translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates while income and expense accounts are translated at the average rates in effect during the year. We record the resulting translation adjustment as part of accumulated other comprehensive income...

  • Page 85
    ... stock units for the year ended December 31: 2003 (Dollars in Millions, Except Per Share Amounts) Reported Income (loss) from continuing operations before cumulative effect of accounting changes ...Add: Stock compensation cost, net of taxes, included above ...Deduct: Total stock compensation cost...

  • Page 86
    ...Subscriber acquisition costs'' and research and development costs in ''General and administrative expenses'' in the Consolidated Statements of Operations as incurred. Advertising expenses, net of payments received from programming content providers for marketing support, were $199.0 million in 2005...

  • Page 87
    ... in accounting for subscriber acquisition, upgrade and retention costs had been applied retroactively for the years ended December 31, 2004 and December 31, 2003: 2004 2003 (Dollars in Millions, Except Per Share Amounts) Reported income (loss) from continuing operations before cumulative effect...

  • Page 88
    ... compensation cost relating to share-based payment transactions be recognized in the financial statements, based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005 and...

  • Page 89
    ...upon receipt of local regulatory approval. DTVLA's local operating company in Mexico, DIRECTV Mexico, has sold its subscriber list to Sky Mexico in exchange for a note receivable and, after completing the transfer of its subscribers to Sky Mexico ceased providing services during 2005. As a result of...

  • Page 90
    ... annual borrowing rate of 4.3%. As a result of this agreement, DIRECTV U.S. has the right to sell its services in all territories across the United States. DIRECTV U.S. recorded the present value of the cash payments to be made to the NRTC plus fees paid associated with the transaction, the total...

  • Page 91
    ... to certain conditions, beginning at the end of 2008. Upon receipt of final approval from the Federal Communications Commission, or FCC, in the third quarter of 2004, DIRECTV U.S. transferred DIRECTV 3 to Telesat and relocated one of its satellites to 72.5 WL to provide additional local channels and...

  • Page 92
    ....1 204.9 240.6 Hughes Network Systems-Set-Top Receiver Manufacturing Operations As part of our sale of HNS' set-top receiver manufacturing operations to Thomson for $250.0 million in cash in June 2004, DIRECTV U.S. entered into a long-term purchase agreement, or the Agreement, with Thomson for the...

  • Page 93
    .... NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) operating profit (loss) excluding the HNS operations that were contributed as part of the SkyTerra transaction and HNS' set-top receiver manufacturing operations that were sold in June 2004: Years Ended December 31, 2005 2004 (Dollars in...

  • Page 94
    ... payments primarily represent cash used in operating activities. Pursuant to a settlement agreement executed on July 15, 2003 related to the purchase price adjustment dispute arising from the 2000 sale of our satellite systems manufacturing businesses to The Boeing Company, or Boeing, we recorded...

  • Page 95
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) Note 4: Satellites, Net and Property and Equipment, Net The following table sets forth the amounts recorded for satellites, net and property and equipment, net at December 31: Estimated Useful Lives (years) 2005 ...

  • Page 96
    ... of Operations during the third quarter of 2004. Note 6: Goodwill and Intangible Assets The changes in the carrying amounts of goodwill by reporting unit for the years ended December 31, 2005 and 2004 were as follows: DIRECTV U.S. DIRECTV Network Latin America Systems (Dollars in Millions) Total...

  • Page 97
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) The following table sets forth the amounts recorded for intangible assets at December 31: December 31, 2005 Estimated Useful Lives (years) Gross Amount Accumulated Amortization December 31, 2004 Net Amount Net ...

  • Page 98
    ...9: Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt Interest Rates at December 31, 2005 December 31, 2005 2004 (Dollars in Millions) Short-term borrowings ...Current portion of long-term debt ...Total short-term borrowings and current portion of...

  • Page 99
    ...1,000.0 1,500.0 5.0 3,415.0 9.7 $3,405.3 $1,400.0 - 1,011.8 9.1 2,420.9 11.4 $2,409.5 Total long-term debt ...Less current portion ...Long-term debt ... During the second quarter of 2005, we refinanced a significant portion of our outstanding debt, as discussed in more detail below. As of December...

  • Page 100
    ...DIRECTV U.S.' ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell...

  • Page 101
    ... amount that would have been recorded on a separate return basis. Our income tax (expense) benefit consisted of the following for the years ended December 31: 2005 2004 2003 (Dollars in Millions) Current tax (expense) U.S. federal ...Foreign ...State and local . benefit: ... $ 14.3 $ (34.9) $ 68...

  • Page 102
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) Our income tax (benefit) expense was different than the amount computed using the U.S. federal statutory income tax rate for the reasons set forth in the following table: 2005 2004 2003 (Dollars in Millions) ...

  • Page 103
    ... might be assessed for open years. Note 11: Pension and Other Postretirement Benefits Many of our employees are eligible to participate in our funded non-contributory defined benefit pension plan, which provides defined benefits based on either years of service and final average salary, or eligible...

  • Page 104
    ... insurance benefits if they retire from our company between the ages of 55 and 65. The health care plan is contributory with participants' contributions adjusted annually; the life insurance plan is non-contributory. We use a November 30 measurement date for our pension and postretirement benefit...

  • Page 105
    ... for the years ended December 31: Other Postretirement Pension Benefits Benefits 2005 2004 2005 2004 (Dollars in Millions) Change in Net Benefit Obligation Net benefit obligation at beginning of year Service cost ...Interest cost ...Plan participants' contributions ...Special termination benefits...

  • Page 106
    ... Weighted-average assumptions used to determine benefit obligations at December 31: Pension Benefits 2005 2004 Other Postretirement Benefits 2005 2004 - - - Discount rate-Qualified Plan ...Discount rate-Non-Qualified Plan ...Expected long-term return on plan assets Rate of compensation...

  • Page 107
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: Pension Benefits 2005 2004 2003 Other Postretirement Benefits 2005 2004 2003 Discount rate-Qualified Plan ...

  • Page 108
    ...We establish and administer the policy in a manner so as to comply at all times with applicable government regulations. There were no shares of our common stock included in plan assets at December 31, 2005 and 2004. Cash Flows Contributions We expect to contribute approximately $65.0 million and $16...

  • Page 109
    ... liabilities of us. Note 12: Stockholders' Equity Capital Stock and Additional Paid-In Capital We are a publicly-traded company with our common stock listed as ''DTV'' on the New York Stock Exchange. As part of the News Corporation transactions completed on December 22, 2003, we amended our...

  • Page 110
    THE DIRECTV GROUP , INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) Immediately prior to the News Corporation transactions, we adjusted the number of shares of common and Class B common stock to assure that the stock outstanding and the stock representing GM's interest accurately ...

  • Page 111
    ... than the average market price of our common stock. Our existing common equivalent shares consist entirely of common stock options and restricted stock units issued to employees. We excluded 66.1 million shares of common stock for the year ended December 31, 2005 because the options' exercise price...

  • Page 112
    ...Income Per Share (Loss) Shares Amounts (Dollars and Shares in Millions, Except Per Share Amounts) Year Ended December 31, 2005: Basic EPS Income from continuing operations before cumulative effect of accounting changes ...Effect of Dilutive Securities Dilutive effect of stock options and restricted...

  • Page 113
    ... summarizes information about stock options outstanding at December 31, 2005: Options Outstanding WeightedAverage Remaining Contractual Life (years) Options Exercisable WeightedAverage Exercise Price WeightedAverage Exercise Price Range of Exercise Prices Number Outstanding Number Exercisable...

  • Page 114
    ... the reduction of corporate office headcount by over half as a result of our plan to consolidate corporate and DIRECTV U.S. support functions. There were also additional headcount reductions at DIRECTV U.S. and at DTVLA. As a result of the completion of the News Corporation transactions on December...

  • Page 115
    ... with News Corporation entities: purchase of programming, products and advertising; license of certain intellectual property, including patents; purchase of system access products, set-top receiver software and support services; sale of advertising space; purchase of employee services; and...

  • Page 116
    ...acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial subscribers. Through April 22, 2005, we also operated the Network Systems segment, a provider of satellite-based private business networks and broadband Internet access. As...

  • Page 117
    ..., INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -(continued) Selected information for our operating segments is reported as follows: DIRECTV U. S. DIRECTV Latin Network Eliminations America Systems and Other (Dollars in Millions) Total 2005 External Revenues ...$12,211.3 Intersegment Revenues...

  • Page 118
    ...from prior business acquisitions. To compensate for the exclusion of depreciation and amortization from operating profit, our management and Board of Directors separately measure and budget for capital expenditures and business acquisitions. We believe this measure is useful to investors, along with...

  • Page 119
    ...from subscribers located in different geographic areas. Property is grouped by its physical location. Years Ended and As of December 31, 2005 2004 2003 Net Property Net Property Net Property Revenues & Satellites Revenues & Satellites Revenues & Satellites (Dollars in Millions) North America United...

  • Page 120
    ... Marketing Agreement. This judgment was stayed under applicable bankruptcy law, and Pegasus also had filed various claims in the bankruptcy proceeding against DIRECTV U.S. and the NRTC. As part of the purchase price paid by DIRECTV U.S. in the transactions with Pegasus, DIRECTV U.S. received credit...

  • Page 121
    ... launch contracts, programming agreements, telemetry, tracking and control services, or TT&C, services agreements, billing system agreements, customer call center maintenance agreements and other vendor obligations. As of December 31, 2005, minimum payments over the terms of applicable contracts are...

  • Page 122
    ...the business or operations of DLA LLC with substantially all of the DTH satellite business or operations of Sky Latin America, an affiliate of News Corporation, or other events as described in the DLA LLC Agreement, or a Sky Deal. We do not believe that at December 31, 2005, the conditions necessary...

  • Page 123
    ... and a $36.5 million charge principally for asset write-downs related to the on-going shut-down of DIRECTV Latin America's Mexico operations For additional information regarding discontinued operations and cumulative effect of accounting changes, see Part II, Item 8 of this Annual Report. 110

  • Page 124
    ... out an evaluation as of the end of the year covered by this Annual Report on Form 10-K under the supervision and with the participation of management, including our principal executive officers and our financial officers, of the effectiveness of our disclosure controls and procedures (as defined in...

  • Page 125
    ...audit report on management's assessment of internal control over financial reporting, which appears below. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To the Board of Directors and Stockholders of The DIRECTV Group, Inc. El Segundo, California...

  • Page 126
    ... 31, 2005 of the Company and our report dated March 6, 2006 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph regarding the Company's change of its method of accounting for subscriber acquisition, upgrade and...

  • Page 127
    ... definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year. *** PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES Page Number...

  • Page 128
    ..., 2003 8-K) Letter Agreement, dated as of August 12, 2004, between The DIRECTV Group, Inc. and Constellation, LLC, and acknowledged by PanAmSat Corporation (incorporated by reference to Exhibit (d) 3 to Amendment No. 4 to Schedule 13E-3 filed with the Securities and Exchange Commission on August 12...

  • Page 129
    ...10.20 to the 2003 Form 10-K) Second Amended and Restated Limited Liability Company Agreement of DIRECTV Latin America, LLC (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Hughes Electronics Corporation filed March 2, 2004 (the ''March 2, 2004 8-K'')) Employment...

  • Page 130
    ... to Exhibit 10.1 to the Current Report on Form 8-K of The DIRECTV Group, Inc., as filed with the Securities and Exchange Commission on June 3, 2004) Asset Purchase Agreement, dated as of July 30, 2004, by and among Pegasus Satellite Television, Inc., Golden Sky Systems, Inc., and each other entity...

  • Page 131
    ..., Inc. as filed with the Securities and Exchange Commission on April 16, 2004) Brazil Business Combination Agreement, dated as October 8, 2004, by and among Globo ˜es e Participa¸ ˜es S.A., The News Corporation Limited, The DIRECTV Comunica¸ co co Group, Inc., DIRECTV Latin America, LLC and GLA...

  • Page 132
    ... Network Systems, Inc., SkyTerra Communications, Inc. and Hughes Network Systems, LLC (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of The DIRECTV Group, Inc., dated December 3, 2004) Terms and Conditions of restricted stock unit awards to independent directors...

  • Page 133
    THE DIRECTV GROUP , INC. ††*10.39 ††*10.40 Terms and Conditions of restricted stock unit awards to applicable executive officers (incorporated herein by reference to Exhibit 10.2 to the February 15, 2005 Form 8-K) Amended and Restated Executive Change in Control Severance Agreement, dated as...

  • Page 134
    ...Incorporated by reference. Filed herewith. Confidential treatment received for certain portions of this exhibit pursuant to Rule 406 promulgated under the Securities Act. Management contract or compensatory plan or arrangement. A copy of any of the exhibits included in this Annual Report on Form 10...

  • Page 135
    THE DIRECTV GROUP , INC. SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF OPERATIONS (Parent Company Only) Years Ended December 31, 2005 2004 2003 (Dollars in Millions) Operating Costs and Expenses General and administrative expenses ...Total Operating Costs and ...

  • Page 136
    THE DIRECTV GROUP , INC. SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only) Years Ended December 31, 2005 2004 2003 (Dollars in Millions) Cash Flows from Operating Activities Net Cash Used in Operating Activities ...Cash Flows from ...

  • Page 137
    ... or advances. In the parent company only financial statements, we state our investments in subsidiaries at cost, net of equity in earnings (losses) of subsidiaries, since the date of formation/acquisition. As a result, we include our interest in the net assets of DIRECTV Holdings LLC, which total...

  • Page 138
    THE DIRECTV GROUP , INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS Additions charged to costs and expenses Additions charged to other accounts Deductions (Dollars in Millions) Description Balance at beginning of year Balance at end of year For the Year Ended December 31, 2005 Allowances ...

  • Page 139
    ..., hereunto duly authorized. THE DIRECTV GROUP, INC. (Registrant) Date: March 10, 2006 By: /s/ MICHAEL W. PALKOVIC Michael W. Palkovic (Executive Vice President and Chief Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this...

  • Page 140
    THE DIRECTV GROUP , INC. Signature Title /s/ CHARLES R. LEE (Charles R. Lee) /s/ PETER A. LUND (Peter A. Lund) /s/ HAIM SABAN (Haim Saban) Director Director Director *** 127

  • Page 141
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 3. 4. /s/ CHASE CAREY Chase Carey Director, President and Chief Executive Officer

  • Page 142
    ...information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 3. 4. /s/ MICHAEL W. PALKOVIC Michael W. Palkovic Executive Vice President and Chief...

  • Page 143
    ...connection with the Annual Report of The DIRECTV Group, Inc. (the ''Corporation'') on Form 10-K for the fiscal year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Chase Carey, Director, President and Chief Executive Officer of the...

  • Page 144
    ... with the Annual Report of The DIRECTV Group, Inc. (the ''Corporation'') on Form 10-K for the fiscal year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Michael W. Palkovic, Executive Vice President and Chief Financial Officer of...

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